* You need to specify an output overlay. Please use --ov-output or set
* PORTDIR_OVERLAY in your make.conf. A standard setting is: /usr/local/portage

Now my understanding of an overlay is that it is just a tree that portage basically leaves alone. I don't seem to be able to create my own, but I have no idea which one I should use? How do you distinguish one overlay from another without someone explicitly telling you to use a specific one?

crossdev will create some ebuilds, which will be used to integrate the cross-compiler with portage. For that reason you need to create a local overlay.

It should be sufficient to make a directory for the overlay (e.g. /usr/local/portage) and pointing PORTDIR_OVERLAY in make.conf to it. Optionally you can create a text file /usr/local/portage/profiles/repo_name and give a name to your overlay.